Ugandan commercial banks’ total assets grew by 8.4 percent from 44.6 trillion shillings as at end-June 2022 to 48.3 trillion shillings as at end-June 2023, the Bank of Uganda has announced.
The banking sector’s robust growth in assets show that the sector remained resilient despite weak economic growth prospects, heightened inflation, and elevated geopolitical tensions.
In its annual report for the Financial Year 2022/2023 released on Monday, the Central Bank attributed the increase in banks’ assets to holdings of Government of Uganda securities, which rose by 12.2 percent, amidst a slowdown in credit growth.
“Concerns about slowing economic growth induced greater caution in banks towards extending loans to the private sector,” said the Central Bank.
The Bank’s report explains that commercial banks’ gross loans and advances increased by 4.7 percent from 18.6 trillion shillings in June 2022 to 19.4 trillion shillings in June 2023.
This was considerably lower than the 12.2 percent growth posted in the previous year.
“Nevertheless, the growth observed this year was boosted by net extensions that amounted to UGX 635.0 billion within the period leading to June 2023. This is suggestive of a potential shift in banks risk tolerance vis-à-vis private sector lending, which could stimulate economic expansion moving forward.” Bank of of Uganda explained.
It added: “However, it should be noted that like in the previous year, net capitalized interest on loans, which accounted for UGX 895.5 billion, remained a significant contributor to the overall increment in loans. Commercial Banks maintained strong capital buffers, majorly due to the increase in the regulatory minimum capital requirements and profitability.”
Commercial banks’ core capital adequacy ratio (CAR) increased from 21.4 percent to 24.8 percent, in part due to a 25.4 percent boost in banks’ current year net after-tax profits and 71.7 percent increase in banks’ permanent shareholders’ equity.
This followed the issuance of the Financial Institutions (Revision of Minimum Capital Requirements) Instrument, 2022 on 16 December 2022 , by the Minister of Finance, Planning and Economic Development (MoFPED) aimed at enhancing the resilience of the Supervised Financial Institutions.
Under the Instrument, the minimum required paid-up capital for Financial Institutions was, effective 31 December 2022, increased to 120 billion shillings and 20 billion shillings from 25 billion shillings and 1 billion shillings, for Tier I (Commercial Banks) and II (Credit Institutions), respectively and to 150 billion shillings and 25 billion shillings by 30 June 2024. Most banks, including all Domestic Systemically Important Banks (DSIBs), have met the minimum capital requirements.
Bank of Uganda further said that in pursuant to the Financial Institutions (Capital Buffers and Leverage Ratio) Regulations 2020, banks complied with the additional capital conservation buffer requirement of 2.5 percent, and the additional Systemic Risk Capital buffer in the range of 0.0 – 1.0 percent for DSIBs, depending on their level of systemic importance.
Nonetheless, Bank of Uganda explains that although initially challenging, liquidity and funding conditions improved towards June 2023. The improvement in funding conditions was partly due to maturities of banks’ investment in treasury bonds that were not rolled over in the bond switch, and an increase in retail deposits from customers.
As a result, the industry ratio of liquid assets to total deposits (liquidity ratio) increased from 46.5 percent in June 2022 to 49.4 percent in June 2023, with all banks meeting the regulatory minimum of 20 percent.
The report indicates that the industry liquidity coverage ratio (LCR), a measure of the ability of banks to withstand a 30-day liquidity stress period, increased from 184.5 percent in June 2022 to 373.4 percent at end-June 2023, well above the 100 percent benchmark.
The report reads that the asset quality on the other hand remains a concern, characterized by the anemic growth in lending activity and an increase in non-performing loans.
The banks’ aggregate non-performing loans (NPLs)–to–gross loans ratio increased from 5.3 percent to 5.7 percent during the year ended June 2023, as the stock of NPLs increased by 12.7 percent compared to only 4.7 percent for gross loans.
The Bank of Uganda Deputy Governor, Michael Atingi-Ego, said Uganda’s economy grew by 5.3 percent during 2022/2023 financial year, which is an improvement from 4.6 percent in the previous year.
“This growth was mainly driven by the services and industry sectors, particularly trade, manufacturing, and construction. This growth demonstrates the resilience of the Uganda economy to the global headwinds that dominated the year,” he said.
Atingi-Ego said despite inflation and geopolitical tensions, the Ugandan banking sector remained resilient, pointing out that total bank assets increased and supervised financial institutions maintained strong capital buffers partly due to increased regulatory minimum capital requirements in line with the Financial Institutions (Revision of Minimum Capital Requirements) Statutory Instrument that was issued in November 2022.